The real estate crisis is at the heart of China’s economic problems

For decades, buying property was considered a safe investment in China. Now, instead of building a wealth base for the country’s middle class, real estate has become a source of discontent and anger.

In more than 100 cities across China, hundreds of thousands of Chinese homeowners are banding together and refusing to repay loans on unfinished properties, one of the most widespread acts of public defiance in a country where even minor protests are suppressed.

The boycotts are part of the fallout from a worsening Chinese economy, slowed by Covid lockdowns, travel restrictions and wavering confidence in the government. The country’s economy is on track for its slowest growth in decades. Its factories sell less to the world and its consumers spend less at home. On Monday, the government said youth unemployment had reached a record level.

Added to these financial setbacks are the problems of a particularly vulnerable sector: real estate.

“Life is extremely difficult and we can no longer afford the monthly mortgage,” homeowners in central China’s Hunan province wrote in a letter to local officials in July. “We have to take risks out of desperation and go down the path of a mortgage strike.”

The mortgage riots have rocked a housing market grappling with the fallout of a decades-old housing bubble. It has also created an unwanted complication for President Xi Jinping, who is expected to serve a third term as party leader later this year with a message of social stability and continued prosperity in China.

Until now, the government has worked hard to limit the attention drawn to boycotts. After an initial flurry of mortgage strike notices went viral on social media, government internet censors sprang into action. But the influence of the strikes has already begun to spread.

The number of properties where homeowner groups have begun or threatened to boycott has reached 326 across the country, according to a crowdsourced list titled “WeNeedHome” on GitHub, an online repository. ANZ Research estimates that boycotts could affect about $222 billion of mortgage loans sitting on bank balance sheets, or about 4 percent of outstanding mortgages.

Any momentum behind the mortgage strikes would add to a growing number of economic problems facing the Chinese Communist Party.

When a rural bank froze withdrawals in central China’s Henan province, it sparked a violent clash between depositors and security forces. Recent college graduates struggle to find work with youth unemployment at 20 percent. Small businesses, the largest provider of jobs, are struggling to survive under the constant threat of COVID-19 lockdowns.

On Tuesday, Chinese Premier Li Keqiang visited the southern tech hub city of Shenzhen, urging a “greater sense of urgency” for an economic recovery. But real estate presents a unique set of challenges.

Real estate powers about a third of China’s economic activity, according to some estimates, and housing accounts for about 70 percent of household wealth, making it the most important investment for most Chinese. . In 2020, to address concerns about an overheated housing market in which homeowners often bought apartments before building them, China began cracking down on excessive borrowing by developers.

The move created a cash crunch for many companies that relied on easy access to debt to keep construction projects going. As financial stress mounted, Evergrande and other big real estate developers fell into default, and the shock rippled across the industry.

Last month, hundreds of companies that provide services and supplies to the real estate sector, such as builders and landscapers, issued a joint statement to government authorities saying they were “facing a crisis of survival” because they had not been paid for months.

Homeowners of a partially built apartment complex in the central Chinese city of Zhengzhou have been compared to Rickshaw Boy, or Camel Xiangzhi, a tragic character in Chinese literature whose dream, a rickshaw of his own, is thwarted by corruption and dishonesty.

“We, like thousands of Xiangzis, must throw off those shackles and let those who stole our money and wreck our cars know that Xiangzi is no longer the lamb slaughtered by others,” the owners wrote in a notice last month to local banks. and government officials. If developers don’t finish building, “all homeowners will forcibly default on loans” by the end of August, they wrote.

One of the homeowners who signed the notice was Andy Li.

Mr. Li first purchased a $150,000 apartment in the development in 2019. After making monthly mortgage payments for three years, he learned in February that the apartment would not be finished by May as promised. In fact, all construction had stopped. Owners were told by Yufa Group, the developer, that delivery was to be delayed until December.

“We don’t even know what happened to the money. How come there is no money? Mr. Li said. “We will definitely stop paying the mortgage if there are really no other ways.”

The Yufa Group was not immediately available for comment, and a phone call went unanswered. A second number on the list had been disconnected. The Zhengzhou local government has said it would set up a bailout fund to provide capital to struggling developers. Last month, the Politburo, China’s top governing body, said local governments should ensure unfinished buildings are completed.

But Michael Pettis, a finance professor at Peking University, said the mortgage boycotts are part of a larger problem: the bursting of a Chinese housing bubble that has been inflating for decades. Even if Chinese authorities provide developers with enough capital, the underlying houses are still overvalued, he said.

“There’s been all this fictitious wealth created by rising real estate prices that just isn’t justified,” Pettis said. “Those solutions are just temporary solutions to try to make things less bad in the short term. Ultimately, I don’t think they’ll make it.”

For years, real estate developers never had to worry too much about financing. Access to credit was easy, and about 90 percent of new houses were “sold early.” Buyers would put down deposits and make mortgage payments before construction was complete.

That system provided developers with the money they needed to keep building, and until recently, homeowners weren’t complaining as property values ​​in China were expected to continue to rise, as they had for decades.

The time has changed.

In the first half of 2022, sales of China’s 100 largest real estate developers fell 50 percent, according to data from China Real Estate Information Corp.

Mr. Li, 29, who works in hotel management, remembers when the market looked much more promising. When he first bought his apartment, he put down a 30 percent down payment with money he got from his parents’ retirement funds. Although he lives in Beijing, he thought the property in Zhengzhou, surrounded by parks and schools, would be a good first step in his plan to return to his hometown and start a family with his wife.

Those plans are now on hold as construction on the Zhengzhou development remains at a standstill. Mr. Li and the other owners intend to carry out the boycott if the situation does not improve, he said. In his letter, the owners acknowledged the risks.

China’s social credit system punishes infractions, such as loan defaults, by limiting an individual’s ability to travel, take their children to school or borrow from banks in the future.

However, in last month’s notice, the owners said those risks did not outweigh the threat to their survival. “When we feel desperate,” they wrote, “the credit system is a paper tiger to us, a shackle that can be thrown away at any time.”

claire fu contributed research.

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